Flash Me the Cash- Dividends Rule! Tanker companies, like their

Flash Me the Cash- Dividends Rule!
Tanker companies, like their drybulk brethren, have gone from strength over the past four
years, as the freight markets have remained strong; even the dips, timecharter equivalents
have exceeded historical highs from the 1980s and 1990s. The degree of investor
infatuation with listed shipping companies is, not surprisingly, proportional to the levels
of Worldscale rates.
Maritime partnership or joint stock structures are hardly innovative ; historically,
investors familiar with shipping have been comfortable with spot exposures and the
opportunity for large pass-throughs of cash. However, when a tanker company chooses to
list on a regulated exchange, it competes in capital raising against the real estate and oil
drillers, or pipelines- where much of the revenue capacity has been contracted out under
long contracts. In energy and property, a common investment vehicle is a Trust, in a
partnership form, or a Limited Partnership, where the entities attract investors by offering
large and stable payouts over time. Institutional investors particularly will look at yield
based stock investments along with bonds, which pay interest on a steady basis.
Two entities- Knightsbridge and Nordic American, originally came into the ma rket as
closed end, limited life companies, tied to term charters with oil majors with fixed
payouts with upside potential. A decade after their inception, they have morphed into
cash conduits that are highly responsive to the better market conditions that began for
VLCC’s and Suezmaxes just when the original charters were waning.
Knightsbridge Tankers began life as a closed end investment during the mid 1990’s,
raising equity for the purchase of five Daewoo built double hulled VLCCs that were put
on bareboat charter to Shell International in March 1997. Knightsbridge, now resembling
dozens of “new age” shipping companies where shareholders outsource all technical and
commercial operations, was ahead of its time because of its market responsiveness and its
early knowledge that institutional investors such as AXA, Equitable Insurance, Goldman
Sachs and money manager Alliance Capital would pay to play in the tanker market,
craving the possible upside of a pass-through arrangement, albeit with a floor, in a ma rket
synonymous with “doldrums”.
Under UK finance leases that are no longer in effect, the original deal was structured as a
seven year firm term with Shell having the option to extend for another seven years when
the first term expired (in March 2004). Shell paid the greater of a base rate (in turn
consisting of a $22,069 daily bareboat charter component plus an operating element of
$10,500 / day), or a panel determined “market rate” for each vessel.
Every quarter, shareholders would garner a dividend, working back to $0.45/share at the
floor rate on the Shell charters. In times of a stronger market, such as late 1997 and in late
2000/ early 2001, more cash would flow through and the dividend was bumped upward.
In late 2000, with the “spot” market rate pegged at $78,145/day, the quarterly dividend
reached $2.00/ share.
Lacking confidence in the market’s strength, Shell did not renew and Knightsbridge
rearranged itself into a perpetual life company; all of its management is dedicated to the
Frontline orga nization under the helm of Ola Lorentzo n, whose company ICB (the
previous manager) was absorbed into John Frederiksen’s organization in 1999 Four of the
five ship fleet is now handled commercially through Frontline joint ventures or pools.
Except for one vessel, “Camden”, on T/C to MISC until early 2009 at US $30,000/day,
the chartering arrangements are highly market responsive. In Spring 2007, two of the
vessels are set to switch from Tankers Internationa l into the employ of Frontline at a base
rate plus a market related element.
Following the reorganization into a perpetual company, the dividends have been
bolstered by the market, reaching $1.75/share in 4Q 2004. FEB 13 ANNOUNCE RE 4Q
2006
Nordic American Tankers
Suezmax specialist Nordic American, with shares trading on the NYSE (under the
symbol “NAT”), was also formed in the mid 1990’s, around three Samsung built double
hull Suezmaxes that went on seven year bareboat charters to BP Shipping in 1997.
Nordic American’s arrangements were similar to those for Knightsbridge; the oil major
paid a bareboat hire of $13,500/vessel per day, plus an operational component of at least
$8500 per day that could rise with the market rates on Suezmax trades- as calculated by
the London broker panel. In the 4Q of 2000, the spot market was pegged at $59,059/daythe resultant quarterly dividend worked out to $1.10/share- compared with the
$0.30/share based on the minimum hire payment in weaker quarters.
Upon expiry of the original charters, with an Ugland related entity acting as the
company’s manager, BP exercised options to continue employment on two of the original
vessels- under timecharters indexed to the spot market. The third was put on a five year
time charter to Gulf Navigation, through end 2009. But the company has also been
expanding beyond its original base.and at end 2006, it took delivery of its twelfth double
hulled vessel, named “Nordic Cosmos”, built at Samsung in 2003 and sold by Greeks to
Nordic American as part of a three vessel deal worth $246 Million. Except for the five
year TC, Nordic American has maintained spot market exposure- even on TC type
contracts. Technical management is parceled out among V Ships, OMI and Teekay
(which acquired Ugland Nordic in 2001), while the spot vessels operate in various
Suezmax pools, including those of Teekay, OMI, Frontline and Stenabulk.
Nordic American has continued to pay out its surplus operating cash flow, after adjusting
for needed reserves as dividends. In its second 2006 stock offering worth, $184 Million
including the “greenshoe”, the company said: “Our business strategy is to manage and
expand our fleet in order to enable us to continue to pay attractive dividends to our
shareholders.” More ships equals more cash flow and more distributions. Indeed, the
dividend performance has been impressive, paying $3.57, $5.31, $4.47 and $ xxx for
results of 2003, 2004, 2005 and 2006, respectively, a far cry from the $1.35/share paid
out during 2002. FEB 14 2007 announce 4Q 2006 and can compute 2006 total (add to
first three quarters $3.97) Investors have enjoyed this heady growth and have reflected
the high payout in the advancing share price.
The ability of any tanker company to pay dividends is constrained by covenants in credit
facilities, which include measures of financial strength or ship valuation in relation to
debt outstanding. Nordic American entered into a fresh debt arrangement which was
renegotiated in late 2005- and subsequently upped to $500 Million in late 2006 in
conjunction with an equity raise. The bank credit, with a group of lenders that includes
DNB Nor ASA and Scotiabank, that is interest only until 2010. Nordic American had
been cautious about financial leverage- where principal payments (which had been
required previously) and interest consume what would be distributions in a more
shareholder friendly environment. NAT’s policy of cappind debt at $15 Million per
vessel is very conservative in a marketplace where its vessels are worth $65- $70 Million
(mid/ late 1990s built) to $80 Million (2002 and 2003 built), and very respectful of debt
covenants which, if violated, would lead to a prohibition on the ability to pay dividends.
***
Frontline / Ship Finance
In an usual twist of the earnings visibility paradigm, offering a clue that shipping
investors, unlike energy and property investors, preferred full payouts, was Frontline. In
late 2003/ early 2004, when it put shipowing into its Ship Finance offshoot, the market
sensitive Frontline offered investors a chance to play volatile tanker markets. When giant
Frontline (controlling an aggregate 19 Million dwt) sold its tanker fleet to Ship Finance
Ltd (SFL), and chartered it back for substantially the remainder of the vessels’ useful
lives, there was no clear consensus tilting towards the upward rate environment that
coalesced shortly thereafter.
A charting of Frontline’s dividends to shareholders provides an indicator of the market
ranging from tepid, as in 2Q 2002 and 3Q 2002 when no dividends were paid, up to hot,
as in 2004 when $12.60/ share was paid out, including $5.00/share in Q1 alone. Early on,
Frontline set a target dividend of $2.50/ share per year, equal to the amount paid out for
the usually steamy 3Q 2006. In Frontline’s initial arrangement with SFL, Frontline took
back some 47 vessels sold to SFL at agreed upon timecharter rates, with management
contracted back to Frontline by SFL.
Unlike some of the others featured in this article, Frontline is not committed to paying out
every last penny allowable, saying “In addition to the normalised quarterly dividend
<$0.625/share, or $2.50/ 4 quarters>, each quarter the Board will evaluate how to utilise
any potential earnings achieved in excess of the dividend break even level. Such earnings
may be retained in the Company to strengthen the balance sheet, they may be used for
capital investments, for repurchase of shares or paid out as additional dividend.” And,
also differently from its peers, Frontline investors have also seen payouts in the form of
shares, in Ship Finance Limited (which owns ships on charter to Frontline and others), in
Golden Ocean (a drybulk specialist) are watching eagerly now as Frontline begins to
move its single hulled Suezmaxes into Sealift, a new entity in the “heavy lift” sector.
SFL, structured as a financial owner, has paid a steady quarterly dividend, at $0.50/share,
from late 2004 into early 2006. Profit share kickers on its Frontline charters bolstered the
dividend, up to $0.53/share in the 3Q 2006. Its profit split, at 20%, is less than that of
analogous “owning companies” profiled later in the article.
General Maritime
General Maritime, with stock symbol “GMR”, went public in late Summer 2001, at a
price of nearly $20/ share, with backing of a smart-money crowd of investors cultivated
by the company founder, ex-banker Peter Georgiopoulos. During 2002, while
maintaining a spot posture in a weak market, GMR shares dipped under $5/share. But
rising rates and accretive (earnings raising) acquisitions turned the company’s fortunes
upward. During 2002, the shares of then peer company Stelmar Tankers (absorbed into
OSG in late 2004) held up much better because of the defensive strategy of placing the
majority vessels out on timecharters. But GMR’s savvy set of financial managers,
recognized that they, like Frontline (which began buying GMR shares around the same
time), could offer both payouts with upside. GMR shifted to a dividend payout strategy in
early 2005, which had the effect of bolstering the share price, partly on the back of the
out-sized dividend payouts flowing from WS rates and TC hires at historic highs.
In early 2005 presentations to investors, GMR defined its strategy, saying: “We intend to
pay a dividend in an amount substantially equal to:
• EBITDA during the previous quarter;
• Less interest expense;
• Less a reserve for indefinite fleet maintenance and renewal”
At that time, when GMR had $250 Million of high yield bond debt on its books, it added:
“The Board currently intends to establish a reserve for Maintenance capital expenditures,
as well as the indefinite renewal of the fleet.”
The slimmed down GMR, which absorbed two large fleets and then sold its single hulled
tonnage at premium prices (and paid off its 10% bonds), has been a good performer in the
stock market. Its timecharter coverage was in the middle of the road, with 55%- the
equivalent of nine vessels, on period employment, out to 2009 in some cases. Always
prescient about the market, GMR has managed to fix at levels well above the softened
spot levels, and preserve a healthy dividend.
THIS CAME NEXT: The importance of the dividend issue, along with the continued
divergent views about payout policies was underscored by General Maritime’s late
February announcement that it would be making a large one time payment of US
$15/share. Going forward, GMR will switch from a policy of paying out maximum
available cash to a periodic $0.50 per quarter target.
At the same time, after having paid down most of its debt, it will be leveraging up again
(under a a newly amended $900 Million credit line), more efficient for shareholders
because of the lower capital cost for debt rather than all equity. There is a strong
relationship between dividend payout and chartering strategy. The quote from GMR’s
Chairman Peter Georgiopoulos sums it up succinctly, “… our decision to establish a fixed
dividend target .. is supported by our significant time charter coverage.”
***
The Frontline/ SFL experiment spawned imitators, with specialist companies created by
larger companies optimizing their finances. Two entities with similar structures are tied
to Stena Bulk / Concordia, and Overseas Shipholding Group. Both are large owners that
have been able to monetize the opportunity to sell vessels in a strong asset market while
retaining control of the tonnage in the marketplace.
Arlington Tankers
Arlington Tankers, listed with symbol “ATB” on the NYSE is a vehicle holding eight
modern vessels (including the two well known “V-Maxes” Stena Victory and Stena
Vision) operated commercially by the Concordia and companies in the Stena sphere. The
vessels, all technically managed by a related company- Northern Marine, are on time
charters at market reflective rates back to their Sellers varying between three and five
years. Nevertheless, a market responsive element is tied on to the basic timecharters, as
described in a recent prospectus: “each Vessel has the possibility of receiving additional
hire from the Charterers through profit sharing arrangements related to the performance
of the tanker markets on specified geographic routes, or from actual time charter rates.”
The “extra hire” is computed based on 50% of the surplus earned by the time charterer,
above the T/C rate from ATB, as computed by specified formulas.
Arlington seeks to pay out the maximum dividend feasible from charter hire after paying
cash expenses and establishing appropriate reserves for maintenance. Since its founding
in late 2004, dividends have been paid every quarter. Its prospectus shows a calculation
for estimated 2006 payouts. All $ are in US currency.
Basic Hire Per Time Charters
Extra Hire- V Maxes
Extra Hire- Panamaxes and Product Carriers
ESTIMATED TOTAL HIRE RECEIVED
Less Vessel Operating Expenses
Less Company Administrative Expenses
Less Finance Expenses (interest only on debt)
ESTIMATED CASH AVAILABLE FOR DIVIDENDS
ESTIMATED PER SHARE DIVIDEND
$64.5 Million
$ 2.4 Million
$ 2.3 Million
$69.2 Million
-$18.8 Million
-$ 2.4 Million
-$12.3 Million
$35.7 Million
$ 2.30/ share
In the calculation above, the vessel operating expenses, set at $5,843/day during 2007 for
its four product tankers, $6,339/day for its two Panamaxes, and $8,269/day for the VMaxes, include a reserve for drydocking The financial expenses reflect the terms of
Arlington’s loan with Royal Bank of Scotland which provides for no repayments of
principal prior to maturity (in January, 2011).
Double Hull Tankers
OSG, a giant in its own right, controlling more than 12 Million dwt., has been exploring
varied financing strategies in recent years, including operating ships that are owned by
others; this enables an “off the books” accounting treatment not employing capital. In
2005, it created a new company, DHT, which owns three VLCCs and four Aframaxes, all
modern ships that are time-chartered back to OSG with various expiries in late 2010
through 2012 and later if renewal options are exercised. Like Arlington, company holds
on to funds need to pay all its expenses, with the intention of passing through the
maximum feasible amounts (after establishing needed reserves) to shareholders. Similarly
to ATB, an affiliated company handles technical management.
The charter rates, reflecting the strong period market at the time the deal was structured
in 3Q 2005, also provide for a 40% profit split on spot market rates earned by OSG
employing the ships in their respective VLCC and Aframax pools, Tankers International
and Aframax International. Management fees for much of 2007 are $5,800/ day on
Aframaxes and $6,500/ day on VLCCs. In a recent prospectus for shares being sold as
OSG reduces its holding in DHT, it estimated cash available for distribution to be $1.23/
share during 2007, down from anticipated 2006 levels. The volatility of DHT’s dividends
reflect the volatile market in the VLCC and Aframax sectors; its 1Q 2006 payment was a
strong $0.53/share; its is estimating that its 4Q 2006 dividend will be $0.30/share, which
would put dividends for 2006 earnings at $1.61/share.
***
In 2007, after nearly half a decade of healthy shipping markets, the sometimes conflicting
concerns of yield (periodic payouts in relation to share price) and revenue visibility (the
proportion of potential vessel-days are committed in forward markets) have been
important considerations to investors. In the marketplace, analysts have contended that
tanker companies with higher payouts, and yields competing with bond investments,
achieve a higher ratio of share price to net asset value per share than their cash-hoarding
brethren.
Ten years after the formation of Knightsbridge Tankers, Singapore has now got the “full
payout” bug, with First Ship Lease and its portfolio of long term steady paying charters,
including seven product and chemical tankers, is now set to be offered to the public.
When the market picks up, several tanker IPOs presently on hold, but in the pipeline, may
well be brought to market. No doubt, investors and ship operators will be keenly aware of
this aspect of company valuation.